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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549   FORM 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2004 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 0-30539 TVIA, INC.  Delaware
    
    77-0549628(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)
 4001 Burton Drive, Santa Clara, California 95054
(Address of Principal Executive Offices) (Zip Code) Registrants telephone number, including area code: (408) 982-8588   Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes  þ   No   o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes  o   No   þ On January 31, 2005, 23,245,307 shares of the Registrants Common Stock, $0.001 par value
per share, were outstanding.




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TVIA, INC. AND SUBSIDIARY FORM 10-Q QUARTERLY PERIOD ENDED DECEMBER 31, 2004 INDEX  
 PagePart I: Financial InformationItem 1: Financial StatementsUnaudited Condensed Consolidated Balance Sheets
    
    
    1Unaudited Condensed Consolidated Statements of Operations
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4: Controls and Procedures
    
    
    27Part II: Other InformationItem 5: Other Events
    
    
    27Item 6: Exhibits and Reports on Form 8-K
    
    
    28Signatures
    
    
    29Exhibit IndexEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 (in thousands)
 DECEMBER 31,
    
    
    MARCH 31,2004
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,696
    
    
    $
    3,259Short-term investments
    
    
    21,591
    
    
    
    23,947Accounts receivable, net
    
    
    630
    
    
    
    295Inventories
    
    
    504
    
    
    
    602Prepaid expenses and other current assets
    
    
    1,097
    
    
    
    1,241Total current assets
    
    
    25,518
    
    
    
    29,344Property and equipment, net
    
    
    1,242
    
    
    
    1,947Other assets
    
    
    507
    
    
    
    112Total assets
    
    $
    27,267
    
    
    $
    31,403LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    219
    
    
    $
    201Accrued liabilities and other
    
    
    659
    
    
    
    657Short-term portion of capital leases
    
    
    
    
    
    
    486Short-term notes payable
    
    
    460
    
    
    
    Total current liabilities
    
    
    1,338
    
    
    
    1,344Long-term notes payable
    
    
    460
    
    
    
    Total liabilities
    
    
    1,798
    
    
    
    1,344Commitments and contingencies (Note 7)Stockholders equity:Common stock, $0.001 par value, 125,000 shares
authorized, 23,013 and
22,576 shares outstanding, respectively
    
    
    23
    
    
    
    23Additional paid-in-capital
    
    
    93,024
    
    
    
    92,798Accumulated comprehensive income (loss)
    
    
    (105
    )
    
    
    8Accumulated deficit
    
    
    (66,723
    )
    
    
    (62,020
    )Treasury stock
    
    
    (750
    )
    
    
    (750
    )Total stockholders equity
    
    
    25,469
    
    
    
    30,059Total liabilities and stockholders equity
    
    $
    27,267
    
    
    $
    31,403
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 1




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TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts) FOR THE THREE MONTHS
    
    
    FOR THE NINE MONTHS ENDEDENDED DECEMBER 31,
    
    
    DECEMBER 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Total revenues
    
    $
    1,090
    
    
    $
    628
    
    
    $
    2,235
    
    
    $
    1,828Cost of revenues
    
    
    589
    
    
    
    359
    
    
    
    1,232
    
    
    
    1,056Gross profit
    
    
    501
    
    
    
    269
    
    
    
    1,003
    
    
    
    772Operating expenses:Research and development
    
    
    1,206
    
    
    
    2,667
    
    
    
    3,716
    
    
    
    5,716Sales, general and administrative
    
    
    979
    
    
    
    650
    
    
    
    2,293
    
    
    
    1,995Total operating expenses
    
    
    2,185
    
    
    
    3,317
    
    
    
    6,009
    
    
    
    7,711Operating loss
    
    
    (1,684
    )
    
    
    (3,048
    )
    
    
    (5,006
    )
    
    
    (6,939
    )Interest income
    
    
    104
    
    
    
    102
    
    
    
    303
    
    
    
    296Gain from sale of software unit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,075Net income (loss)
    
    $
    (1,580
    )
    
    $
    (2,946
    )
    
    $
    (4,703
    )
    
    $
    2,432Basic net income (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    0.11Diluted net income (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    0.10Shares used in the per share calculation:Basic
    
    
    22,857
    
    
    
    22,374
    
    
    
    22,754
    
    
    
    22,234Diluted
    
    
    22,857
    
    
    
    22,374
    
    
    
    22,754
    
    
    
    23,695
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2




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TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
 FOR THE NINE MONTHS ENDEDDECEMBER 31,2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (4,703
    )
    
    $
    2,432Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    901
    
    
    
    1,251Loss in disposal of fixed assets
    
    
    104
    
    
    
    Write-down of license technology
    
    
    81
    
    
    
    1,449Gain on sale of software unit
    
    
    
    
    
    
    (9,075
    )Change in assets and liabilities:Accounts receivable
    
    
    (335
    )
    
    
    (105
    )Inventories
    
    
    98
    
    
    
    454Prepaid expenses and other current assets
    
    
    (164
    )
    
    
    (256
    )Accounts payable
    
    
    18
    
    
    
    29Accrued liabilities and other
    
    
    2
    
    
    
    (317
    )Net cash used in operating activities
    
    
    (3,998
    )
    
    
    (4,138
    )Cash flows from investing activities:Sales of available-for-sale investments
    
    
    6,554
    
    
    
    28,239Purchases of available-for-sale investments
    
    
    (4,311
    )
    
    
    (39,055
    )Proceeds from sale of software unit
    
    
    753
    
    
    
    8,325Purchases of license technology
    
    
    
    
    
    
    (44
    )Purchases of property and equipment
    
    
    (409
    )
    
    
    (75
    )Proceeds from disposal of fixed assets
    
    
    
    
    
    
    46Net cash provided by (used in) investing activities
    
    
    2,587
    
    
    
    (2,564
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    226
    
    
    
    296Repayment of capital lease obligations
    
    
    (378
    )
    
    
    (445
    )Net cash used by financing activities
    
    
    (152
    )
    
    
    (149
    )Decrease in cash and cash equivalents
    
    
    (1,563
    )
    
    
    (6,851
    )Cash and cash equivalents at beginning of period
    
    
    3,259
    
    
    
    11,080Cash and cash equivalents at end of period
    
    $
    1,696
    
    
    $
    4,229Supplemental disclosure of non-cash activities:Notes payable issued for the right to the use of design software
    
    $
    920
    
    
    $
    
 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3




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TVIA, INC. AND SUBSIDIARY 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1  INTERIM STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments considered necessary for a fair presentation have been
included. These accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of Tvia, Inc. and subsidiary (the
Company) for the fiscal year ended March 31, 2004, which are included in the Companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission on June 22, 2004. Operating
results for the three and nine months ended December 31, 2004, are not necessarily indicative of
the results that may be expected for the fiscal year ending March 31, 2005. NOTE 2  SUMMARY OF SIGNIFICANT POLICIES Use of Estimates The preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates, and such
differences could be material and affect the results of operations reported in future periods. Consolidation The condensed consolidated financial statements herein presented include the results and
financial position of Tvia and its wholly-owned subsidiary in China. The functional currency of the
Chinese subsidiary is the U.S. dollar; accordingly, all gains and losses arising from foreign
currency transactions in currencies other than the U.S. dollar are included in the condensed
consolidated statements of operations. All intercompany transactions and balances have been
eliminated in the consolidation. Cash and Cash Equivalents and Short-Term Investments The Company considers all highly liquid investment securities with original maturities of
three months or less from the date of purchase to be cash and cash equivalents. Management
determines the appropriate classification of short-term investments at the time of purchase and
evaluates such designations as of each balance sheet date. To date, all short-term investments
have been categorized as available-for-sale and are carried at fair value with unrealized gains and
losses, if any, included as a component of accumulated comprehensive income in stockholders
equity, net of any related tax effects. Interest, dividends and realized gains and losses are
included in interest income in the condensed consolidated statements of operations. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market value and include
materials, labor and overhead. Allowances when required are made to reduce excess and obsolete
inventories to their estimated net realizable values. Property and Equipment Property and equipment are carried at cost and are depreciated using the straight-line method
over the assets estimated useful life of two to five years. Management has determined asset lives
based on their historical 4




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experience of technical obsolescence of equipment and the short life of tooling that is
specific to certain product families. Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. The Company measures recoverability of assets by comparing their carrying amount
to the future undiscounted cash flows that they are expected to generate. Impairment reflects the
amount by which the carrying value of the assets exceeds their fair market value. Revenue Recognition The Company recognizes revenue from product sales upon shipment to the original equipment
manufacturers, or OEMs, and end users provided that persuasive evidence of an arrangement exists,
the price is fixed, title has transferred, collection of resulting receivables is reasonably
assured, there are no customer acceptance requirements, and there are no remaining significant
obligations. Reserves for sales returns and allowances are recorded at the time of shipment. Sales
to distributors are made under agreements allowing for returns or credits under certain
circumstances. The Company defers recognition of revenue on sales to distributors until products
are resold by the distributor to the end user. The Company warrants its products; warranty claims
historically have been insignificant. The Company also sells software development kits and application modules to OEMs. The Company
recognizes sales of software development kits and application modules when an agreement has been
executed or a definitive purchase order has been received and the product has been delivered, no
significant obligations with regard to implementation remain, the fee is fixed and determinable and
collectibility is probable. The maintenance portion of the arrangements is recognized over the
maintenance period on a straight-line basis. Software Development Costs The Company has expensed all software development costs to date as substantially all of such
development costs have been incurred prior to the Companys products attaining technological
feasibility. Research and Development Expenses Research and development expenses consist primarily of salaries and related costs of employees
engaged in research, design and development activities. The Company expenses all research and
development related expenses in the period in which such expenses are incurred. Income Taxes Income taxes are accounted for on the asset and liability method. Under this method, deferred
income taxes are recognized based on the estimated future tax effects of differences between the
financial and tax basis of assets and liabilities under the provisions of enacted tax laws. The
effect on deferred taxes of a change in tax rate is recognized in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce deferred taxes to
the amounts expected to be realized. 5




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Comprehensive Income (Loss) Comprehensive income or loss includes all changes in equity during a period from transactions
and events from non owner sources. A summary of comprehensive income (loss) is as follows (in
thousands): For the Three Months
    
    
    For the Nine MonthsEnded December 31,
    
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income (loss)
    
    $
    (1,580
    )
    
    $
    (2,946
    )
    
    $
    (4,703
    )
    
    $
    2,432Unrealized gain (loss) on
available-for-sale investments
    
    
    (40
    )
    
    
    (22
    )
    
    
    (113
    )
    
    
    (33
    )Comprehensive income (loss)
    
    $
    (1,620
    )
    
    $
    (2,968
    )
    
    $
    (4,816
    )
    
    $
    2,399
 Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004. The American Jobs Creation Act introduces
a special one-time dividends received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP FAS 109-2 provides
accounting and disclosure guidance for the repatriation provision. Although FSP FAS 109-2 is
effective immediately, until the Treasury Department or Congress provides additional clarifying
language on key elements of the repatriation provision, the Company will not be able to determine
the amount of foreign earnings we would repatriate. The Company will complete its evaluation after
the government has provided the necessary guidance. In December 2004, the
FASB issued Statement No. 123 (R), Share-Based Payment (revised 2004).
Statement 123(R) would require the Company to measure all stock-based compensation awards using a
fair value method and record such expense in the consolidated financial statements. In addition,
the adoption of Statement 123(R) will require additional accounting related to the income tax
effects and additional disclosure regarding the cash flow effects resulting from share-based
payment arrangements. Statement 123(R) is effective beginning in the second quarter of fiscal year
2006. The Companys management is currently evaluating the impact of this standard on the Companys
financial statements. In December 2004, the FASB issued SFAS Statement No. 153, Exchanges of Nonmonetary Assets. The
Statement is an amendment of APB Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The Company believes that the adoption
of this standard will have no material impact on its financial statements. In November 2004, the FASB has issued FASB Statement No. 151, Inventory Costs, an Amendment of ARB
No. 43, Chapter 4 (FAS No. 151). The amendments made by FAS No. 151 are intended to improve
financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the normal capacity of
the production facilities. The guidance is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred
during fiscal years beginning after November 23, 2004. The provisions of FAS No. 151 will be
applied prospectively. The Company believes that the adoption of this standard will have no
material impact on its financial statements. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements using the intrinsic
value method as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and Financial Accounting Standards Board Interpretation No. 44
Accounting for Certain Transactions 6




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Involving Stock Compensation (FIN 44). Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair value of the Companys stock at the date of grant over
the stock option exercise price. Expense associated with stock-based compensation is amortized on
an accelerated basis over the vesting period of the individual award consistent with the method
described in Financial Accounting Standards Board Interpretation No. 28 (FIN 28). The Company
accounts for stock issued to non-employees in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123),
SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure and Emerging
Issues Task Force Consensus No. 96-18, Accounting for Equity Instruments that are offered to other
than employees for acquiring or in conjunction with selling goods or services (EITF 96-18).
Under SFAS No. 123, SFAS No.148 and EITF 96-18, stock option awards issued to non-employees are
accounted for at their fair value, determined using the Black-Scholes option pricing method. The
fair value of each non-employee stock option or award is remeasured at each period end until a
commitment date is reached, which is generally the vesting date. The following table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to the stock-based employee compensation. For the Three Months
    
    
    For the Nine MonthsEnded December 31,
    
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income (loss) as reported
    
    $
    (1,580
    )
    
    $
    (2,946
    )
    
    $
    (4,703
    )
    
    $
    2,432Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards,
net of related tax effects
    
    
    (357
    )
    
    
    (384
    )
    
    
    (1,315
    )
    
    
    (890
    )Pro forma net income (loss)
    
    $
    (1,937
    )
    
    $
    (3,330
    )
    
    $
    (6,018
    )
    
    $
    1,542Basic net income (loss) per
share:As reported
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    0.11Pro forma
    
    $
    (0.08
    )
    
    $
    (0.15
    )
    
    $
    (0.26
    )
    
    $
    0.07Diluted net income (loss)
per share:As reported
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    0.10Pro forma
    
    $
    (0.08
    )
    
    $
    (0.15
    )
    
    $
    (0.26
    )
    
    $
    0.07
 Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted average number of shares of
common stock outstanding. Diluted net income per share is computed based on the weighted average
number of shares of common stock outstanding for the period plus dilutive common equivalent shares
including stock options and warrants using the treasury stock method. Diluted loss per share
information is the same as basic net loss per share since common shares issuable upon conversion of
the stock options and warrants are antidilutive. The following table sets forth the computation of
basic and diluted net income (loss) per share (in thousands except per share amounts): 7




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For the three months
    
    
    For the nine monthsended December 31,
    
    
    ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income (loss)
    
    $
    (1,580
    )
    
    $
    (2,946
    )
    
    $
    (4,703
    )
    
    $
    2,432Basic and diluted:Weighted average shares of common
stock outstanding
    
    
    22,857
    
    
    
    22,374
    
    
    
    22,754
    
    
    
    22,254Less: Weighted average shares of
common stock subject to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Weighted average shares used in computing
basic net income (loss) per share
    
    
    22,857
    
    
    
    22,374
    
    
    
    22,754
    
    
    
    22,234Diluted effect of common share equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,461Weighted average shares used in computing
diluted net income (loss) per share
    
    
    22,857
    
    
    
    22,374
    
    
    
    22,754
    
    
    
    23,695Basic net income (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    0.11Diluted net income (loss) per share
    
    $
    (0.07
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    0.10
 All outstanding stock options and warrants have been excluded from the calculation of diluted net
loss per share as all such securities were anti-dilutive for all periods presented. The total
number of shares excluded from the calculation of diluted net loss per share is as follows (in
thousands): Three Months
    
    
    Nine MonthsEnded December 31,
    
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Options and warrants to purchase common stock
    
    
    5,928
    
    
    
    5,452
    
    
    
    5,928
    
    
    
    1,461
 8




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Note 3. Balance Sheet Components (in thousands) December 31,
    
    
    March 31,2004
    
    
    2004Accounts receivable, net:Accounts receivable
    
    $
    638
    
    
    $
    298Less: Allowance for doubtful accounts
    
    
    (8
    )
    
    
    (3
    )$
    630
    
    
    $
    295Allowance for doubtful accounts:Balance at beginning of the year
    
    $
    3
    
    
    $
    50Addition
    
    
    5
    
    
    
    15Utilized
    
    
    
    
    
    
    (62
    )Balance at end of the year
    
    $
    8
    
    
    $
    3Inventories:Raw materials
    
    $
    180
    
    
    $
    165Work-in-process
    
    
    53
    
    
    
    42Finished goods
    
    
    271
    
    
    
    395$
    504
    
    
    $
    602Prepaid expenses and other current assets:Escrow receivable
    
    $
    
    
    
    $
    753Interest receivable
    
    
    428
    
    
    
    289Software rental prepayment
    
    
    460
    
    
    
    Prepaid insurance
    
    
    65
    
    
    
    32Other
    
    
    144
    
    
    
    167$
    1,097
    
    
    $
    1,241Property and equipment, net:Furniture and fixtures (Useful life of two years)
    
    $
    39
    
    
    $
    39Machinery and equipment (Useful life of two to five years)
    
    
    2,787
    
    
    
    2,775Software (Useful life of two to five years)
    
    
    2,851
    
    
    
    2,8515,677
    
    
    
    5,665Less: Accumulated depreciation and amortization
    
    
    (4,435
    )
    
    
    (3,718
    )$
    1,242
    
    
    $
    1,947Other assets:License technology, net
    
    $
    
    
    
    $
    80Software rental prepayment
    
    
    460
    
    
    
    Deposits and other
    
    
    47
    
    
    
    32$
    507
    
    
    $
    112Accrued expenses:Accrued compensation costs
    
    $
    501
    
    
    $
    421Accrued
professional fees
    
    
    112
    
    
    
    15Other
    
    
    46
    
    
    
    221$
    659
    
    
    $
    657
 9




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##### Table of Contents



Note 4. Short-term Investments The value of the Companys investments by major security type is as follows: As of December 31, 2004Amortized
    
    
    Aggregate
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Fair Value
    
    
    Gain
    
    
    Loss(In thousands)U.S. government and agency securities
    
    $
    7,000
    
    
    $
    6,956
    
    
    $
    
    
    
    $
    44Certificates of deposit and money market
funds
    
    
    504
    
    
    
    499
    
    
    
    
    
    
    
    5Corporate and bank debt
    
    
    14,192
    
    
    
    14,136
    
    
    
    
    
    
    
    56Total
    
    $
    21,696
    
    
    $
    21,591
    
    
    $
    
    
    
    $
    105
 As of March 31, 2004Amortized
    
    
    Aggregate
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Fair Value
    
    
    Gain
    
    
    Loss(In thousands)Government and agency securities
    
    $
    6,000
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    US corporate and bank debt
    
    
    17,939
    
    
    
    17,947
    
    
    
    8
    
    
    
    Total
    
    $
    23,939
    
    
    $
    23,947
    
    
    $
    8
    
    
    $
    
 Note 5. Concentration of Certain Risks The Company is subject to the risks associated with similar technology companies. These risks
include, but are not limited to: history of operating losses, dependence on a small number of key
individuals, customers and 10




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##### Table of Contents



suppliers, competition from larger and more established companies, the
impact of rapid technological changes and changes in customer demand and requirements . Significant customers Revenues to significant customers, those representing approximately 10% or more of total
revenues for the respective periods, are summarized as follows: Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Customer A
    
    
    53
    %
    
    
    *
    
    
    
    40
    %
    
    
    15
    %Customer B
    
    
    *
    
    
    
    *
    
    
    
    17
    %
    
    
    15
    %Customer C
    
    
    *
    
    
    
    26
    %
    
    
    *
    
    
    
    11
    %Customer D
    
    
    *
    
    
    
    23
    %
    
    
    *
    
    
    
    15
    %Customer E
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    13
    %
    Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of bank deposits and accounts receivable. The Company places its cash and cash
equivalents in checking and money market accounts in financial institutions. The Companys accounts
receivable are derived primarily from sales to OEMs and distributors. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for potential doubtful accounts. Accounts receivable were concentrated with customers as follows: December 31
    
    
    March 31,2004
    
    
    2004Accounts Receivable:Customer A
    
    
    56
    %
    
    
    *Customer B
    
    
    20
    %
    
    
    *Customer C
    
    
    11
    %
    
    
    *Customer D
    
    
    *
    
    
    
    20
    %Customer D
    
    
    *
    
    
    
    17
    %Customer F
    
    
    *
    
    
    
    15
    %
    Vendor Concentration The Company does not own or operate a fabrication facility, and accordingly relies
substantially on three outside foundries, United Manufacturing Corporation (UMC) and Taiwan
Semiconductor Manufacturing Corporation (TSMC), both located in Taiwan, and HuaHong NEC located
in the Peoples Republic of China, to supply all of the Companys semiconductor manufacturing
requirements. There are significant risks associated with 11




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##### Table of Contents



the Companys reliance on outside
foundries, including the lack of ensured wafer supply, limited control over delivery schedules,
quality assurance and control, manufacturing yields and production costs and the unavailability of
or delays in obtaining access to key process technologies. Any inability of one of the foundries to
provide the necessary components could result in significant delays and could have a material
adverse effect on the Companys business, financial condition and results of operations. In the
event either foundry suffers financial difficulties or any damage or destruction to its respective
facilities, or in the event of any other disruption of foundry capacity, the Company may not be
able to qualify alternative manufacturing sources for existing or new products in a timely manner. Substantially all of the Companys products are assembled and tested by one of three
third-party subcontractors, Siliconware Precision Industries Ltd., and Advance Semiconductor
Engineering, Inc., both located in Taiwan, and Shanghai Belling Corp., Ltd. located in the Peoples
Republic of China. The availability of assembly and testing services from these subcontractors
could be adversely affected in the event any subcontractor experiences financial difficulties or
suffers any damage or destruction to its respective facilities, or in the event of any other
disruption of assembly and testing capacity. As a result of this reliance on third-party
subcontractors for assembly and testing of its products, the Company cannot directly control
product delivery schedules, which has in the past, and could in the future, result in product
shortages or quality assurance problems that could increase the cost of manufacture, assembly or
testing of the Companys products. Note 6 . Segment and Geographic Information The Company is organized and operates in one reportable segment, which is the development,
manufacture and sale of streaming media integrated circuits for the advanced television and
emerging interactive display markets. The following table summarizes revenues by geographic area as a percentage of total revenues: For the three months
    
    
    For the nine monthsended December 31,
    
    
    ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003United Kingdom
    
    
    52
    %
    
    
    1
    %
    
    
    40
    %
    
    
    15
    %United States
    
    
    17
    %
    
    
    34
    %
    
    
    13
    %
    
    
    26
    %Japan
    
    
    14
    %
    
    
    9
    %
    
    
    17
    %
    
    
    15
    %Taiwan
    
    
    4
    %
    
    
    26
    %
    
    
    7
    %
    
    
    17
    %Germany
    
    
    *
    
    
    
    10
    %
    
    
    1
    %
    
    
    14
    %Other
    
    
    13
    %
    
    
    20
    %
    
    
    22
    %
    
    
    13
    %
 Note 7. Commitments and Contingencies Stock Repurchase On November 10, 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market. Under this program, the Board of
Directors authorized the acquisition of up to 200,000 of the Companys common stock. As of
December 31, 2004, the Company had acquired 144,400 shares on the open market that it holds as
treasury stock. On August 20, 2002, the Board of Directors authorized an additional stock repurchase program
to acquire outstanding common stock in the open market. Under this program, the Board of Directors
authorized the acquisition up to 5 million shares of common stock. As of December 31, 2004, the
Company had not repurchased any shares of common stock under this program. 12




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##### Table of Contents



Litigation The Company is subject to various claims which arise in the normal course of business. In the
opinion of management, the Company is unaware of any claims which would have a material adverse
effect on the financial position, liquidity or results of operations of the Company. Commitments The Company leases its facilities under non-cancelable operating leases expiring at various
dates through July 2005. In December 2004, the Company acquired the right to the use of design
software for a period of two years in exchange for the issuance of notes payable. As of December 31, 2004, the Company has cash contractual obligations are as follows (in
thousands): Fiscal
    
    Notes
    
    
    Operating
    
    
    PurchaseYear
    
    Payables
    
    
    Leases
    
    
    Commitments
    
    
    Total2005
    
    $
    125
    
    
    $
    43
    
    
    $
    450
    
    
    $
    6182006
    
    
    500
    
    
    
    47
    
    
    
    
    
    
    
    5472007
    
    
    375
    
    
    
    
    
    
    
    
    
    
    
    375Total minimum lease payments
    
    
    1,000
    
    
    $
    90
    
    
    $
    450
    
    
    $
    1,540Less: Amount representing interest
    
    
    (80
    )Present value of minimum payments
    
    
    920Less: Current portion
    
    
    (460
    )Long-term portion
    
    $
    460
 13




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the unaudited condensed financial statements and notes thereto
set forth in Item 1 of this report. In addition to historical information, this Quarterly Report onForm 10-Qcontains
forward-looking statements, including statements regarding revenues and sources of revenues,
expenses, net losses, gross margin, customer production, market and industry trends, competition,
the reasonableness of our accounting assumptions and the effect of certain accounting principles on
our consolidated financial statements, purchase commitments, and the uses of and adequacy of our
capital resources, that involve risks and uncertainties that could cause actual results to differ
materially. Factors that might cause or contribute to such differences include, but are not limited
to, those discussed in the section entitled Managements Discussion and Analysis of Financial
Condition and Results of OperationsFactors That May Affect Future Results. You should carefully
review the risks described herein and in other documents we file from time to time with the
Securities and Exchange Commission, including the Annual Report onForm 10-Kfor fiscal 2004 and
the other Quarterly Report onForm 10-Qfiled by us in our fiscal 2005. When used in this report,
the words expects, anticipates, estimates, and similar expressions, as well as statements
regarding Tvias focus for the future, are generally intended to identify forward-looking
statements. You should not place undue reliance on these forward-looking statements, which speak
only as of the date of this Quarterly Report onForm 10-Q. We undertake no obligation to publicly
release any revisions to the forward-looking statements or reflect events or circumstances after
the date of this document. Overview We design, develop and market display processors for the interactive-television market as well
as a family of flexible, high-quality display processors tailored to the Asia Pacific television
manufacturers creating next-generation digital LCD, HD, and progressive-scan televisions. We have a subsidiary in Hefei, Peoples Republic of China, which performs final test, sales
and research and development activities. We currently offer five product families: the TrueView 5700 family, introduced in calendar
year 2004; the CyberPro 5600 family, introduced in calendar year 2003; the CyberPro 5202 family,
introduced in calendar year 2002; the CyberPro 5300 family, introduced in calendar year 1999; and
the CyberPro 5000 family, introduced in calendar year 1998. These product families currently
generate most of our revenues. We sell our products through two channels. First, we sell our
products directly to original equipment manufacturers, or OEMs, and recognize revenues at the time
of shipment to these OEMs. Second, we sell our products to a number of distributors. We defer
recognition of revenues for sales to our distributors until they have sold our products to
end-users. Approximately 83% and 87% of our total revenues for the three and nine months ended December
31, 2004, respectively, were derived from customers located outside the United States compared to
66% and 74% in the same periods in fiscal 2004. All of our revenues to date have been denominated
in United States dollars. Historically, a relatively small number of customers and distributors
have accounted for a significant portion of our product sales. One customer accounted for 53%
total revenues in the three months ended December 31, 2004 while our top two customers, including
distributors, accounted for 49% of total revenues in the same period of fiscal 2004. In the nine
months ended December 31, 2004, our top two customers, including distributors, accounted for 57% of
total revenues, compared to 69% of total revenues generated from our top five customers, including
distributors, in the same period of fiscal 2005. Various factors have affected and may continue to affect our gross margin. These factors
include, but are not limited to, our product mix, the position of our products in their respective
life cycles, yields and the mix of our product sales and development contracts and other revenues.
For example, newly introduced products generally have higher average selling prices and generate
higher gross margins. Both average selling prices and the related 14




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##### Table of Contents



gross margins typically decline over product life cycles due to competitive pressures and
volume price agreements. Our gross margin and operating results in the future may continue to
fluctuate as a result of these and other factors. The sales cycle for the test and evaluation of our products can range from three months to
nine months or more, with an additional three to nine months or more before an OEM customer
commences volume production of equipment incorporating our products, if ever. Due to these lengthy
sales cycles, we may experience a delay between incurring operating expenses and inventory costs
and the generation of revenues from design wins. We have sustained operating losses on a quarterly and annual basis since inception, except in
fiscal 2004. As of December 31, 2004, we had an accumulated deficit of approximately $66.7
million. These losses resulted from significant costs incurred in the planning and development of
our technology and services and from significant marketing costs. We expect to experience
significant research and development expenses, as we design and market new technologies. We anticipate an increase in revenues in the next quarter as compared to the same period in
the prior fiscal year. We believe that it will take time for customers to ramp up production of
digital television, while the interactive television industry is not expected to recover for one to
two years. Critical Accounting Policies For critical accounting policies affecting us, see Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for
the year ended March 31, 2004 and on Form 10-Q for the quarter ended September 30, 2004. Critical
accounting policies affecting us have not changed materially since March 31, 2004. Results of Operations The following table sets forth, for the periods indicated, certain financial data as a
percentage of revenue: For the three months
    
    
    For the nine monthsended December 31,
    
    
    ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    54
    
    
    
    57
    
    
    
    55
    
    
    
    58Gross profit
    
    
    46
    
    
    
    43
    
    
    
    45
    
    
    
    42Operating expenses:Research and development
    
    
    111
    
    
    
    425
    
    
    
    166
    
    
    
    313Sales, general and administrative
    
    
    90
    
    
    
    103
    
    
    
    103
    
    
    
    109Total operating expenses
    
    
    201
    
    
    
    528
    
    
    
    269
    
    
    
    422Operating loss
    
    
    (155
    )
    
    
    (485
    )
    
    
    (224
    )
    
    
    (380
    )Interest income
    
    
    10
    
    
    
    16
    
    
    
    14
    
    
    
    16Gain on sale of software business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    497Net income (loss)
    
    
    (145
    )%
    
    
    (469
    )%
    
    
    (210
    )%
    
    
    133
    %
 Revenues. Revenues of the three months ended December 31, 2004 were $1.1 million compared to
$0.6 million in the same period in fiscal 2004. Revenues increased to $2.2 million in the nine
months ended December 15




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##### Table of Contents



31, 2004, compared to $1.8 million in the nine months ended December 31, 2003, substantially
driven by increase in units sales volume. These increases in revenues resulted from strong
demand of our Cyberpro 5300 products which shipments to SMS Electronics, Ltd. accounted for 53% of
total revenues for the three months ended December 31, 2004. Sales to Hughes Network Systems and
Weikeng Industrial Co., Ltd. accounted for 26% and 23% of our total revenues for the three months
ended December 31, 2003, respectively. Revenues to SMS Electronics, Ltd. and Kanematsu Devices
Corporation accounted for 40% and 17%, respectively, of total revenues for the nine months ended
December 31, 2004. Sales to SMS Electronics, Ltd., Kanematsu Devices Corporation, Weikeng
Industrial Co., Ltd., Fujitsu-Siemens, Inc. and Hughes accounted for 15%, 15%, 15%, 13% and 11% of
our total revenues for the nine months ended December 31, 2003, respectively. We anticipate an
increase in revenues in the next quarter as compared to the same period in the prior fiscal year. Gross margin. Gross margin for the three and nine months ended December 31, 2004 was 46% and
45%, respectively, compared to 43% and 42% in the same periods of fiscal 2004. The increase in
gross margin in the three and nine months ended December 31, 2004 compared to the same periods in
fiscal 2003 resulted primarily from lower overhead burden as a percentage of higher revenues. The
reduction in overhead burden was due to lower facility costs. Many factors affect our gross
margin, including, but not limited to, our product mix, the position of our products in their
respective life cycles, yields and the mix of our product sales and development contracts and other
revenues. We expect our gross margin in the next quarter will be similar to the quarter ended
December 31, 2004. Research and development. Research and development expenses include personnel and other costs
associated with the development of product designs, process technology, software and programming
hardware. Our research and development expenses reflect our continuing efforts to develop and
bring to market innovative and cost effective semiconductors for next generation high definition
digital LCD TVs, progressive CRT TVs, and interactive set-top boxes. Research and development
expenses decreased to $1.2 million and $3.7 million in the three and nine months ended December 31,
2004 from $2.7 million and $5.7 million in the three and nine months ended December 31, 2003. The
decrease in research and development expenses in the three months ended December 31, 2004 compared
to the same period of fiscal 2004 is attributable primarily to a $1.4 million license technology
write-off in the third quarter of fiscal 2004. The decrease in research and development expenses
in absolute dollars and as a percentage of revenues in the nine months ended December 31, 2004
compared to the same period of fiscal 2004 is attributable primarily to a $1.4 million license
technology write-off in the third quarter of fiscal 2004 and the sale of our software unit to
Mediatek in the second quarter of fiscal 2004. We expect that absolute research and development
expenses will increase in the next quarter, as compared to the quarter ended December 31, 2004, due
to product development prototype expenses. Sales, general and administrative. Sales, general and administrative expenses consist
primarily of personnel and other costs associated with the management of our business and with the
sale and marketing of our products. Sales, general and administrative expenses increased to $1.0
and $2.3 million in the three and nine months ended December 31, 2004, respectively, compared to
$0.7 million and $2.0 million in the three and nine months ended December 31, 2003, respectively.
These increases in sales, general and administrative expenses resulted primarily from the addition
of several headcount to the sales and marketing organization during the quarter ended December 31,
2004. We expect that sales, general and administrative expenses in the next quarter will be higher
compared to the quarter ended December 31, 2004 due to the sales and marketing expenses needed to
support higher revenues. Interest income. Interest income was $0.1 million and $0.3 million for the three and nine
months ended December 31, 2004, respectively, compared to $0.1 million and $0.3 million for the
three and nine months ended December 31, 2003, respectively. Gain on sale of software unit.The Company recorded a gain on a sale of its software business
and software-related assets to MediaTek, Inc. in exchange for $10 million in cash in the second
quarter ended September 30, 2003. Expenses related to this transaction amounted to $0.9 million. Provision for income tax. We are taxed in our jurisdictions of operations based on the extent
of taxable income generated in each jurisdiction. For income tax purposes, revenues are attributed
to the taxable jurisdiction where the sales transactions generating the revenues were initiated.
We incurred operating losses in the three and nine months ended December 31, 2004, and therefore
made no provision for income tax in these periods. No 16




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##### Table of Contents



provision for income taxes was recorded for the income in the three and nine months ended
December 31, 2003 as a result of net operating losses carried over from prior years. Due to
recurring losses, we continue to record a full valuation allowance against all of our net deferred
tax assets due to uncertainty as to their future realization. Liquidity and Capital Resources Net cash used in operating activities were $4.0 million and $4.1 million during the nine
months ended December 31, 2004 and 2003, respectively. Cash used in operations during the nine
months ended December 31, 2004 resulted primarily from the net loss of $4.7 million and increases
in accounts receivable, and prepaid expenses and other current assets of $0.3 million and $0.2
million, respectively, partially offset by non-cash items of depreciation and amortization of $0.9
million and disposal of fixed assets and licensed technology of $0.2 million. Cash used in
operations during the nine months ended December 31, 2003 resulted primarily from net income of
$2.4 million, non-cash items of depreciation and amortization of
$1.3 million, a $1.4 million
write-off of license technology and a decrease in inventories of $0.5 million, partially offset by
a $9.1 million gain from the sale of the software unit, an increase in prepaid expenses and other
current assets of $0.3 million, and a decrease in accrued liabilities and other of $0.3 million. Cash flows provided by investing activities were $2.6 million during the nine months ended
December 31, 2004 compared to cash flows of $2.6 million used in investing activities during the
nine months ended December 31, 2003. In the nine months ended December 31, 2004, $6.6 million and
$0.8 million were provided by the maturity of short-term investments and proceeds from the sale of
the software business unit, respectively, while $4.3 million and $0.4 million were used to purchase
short-term investments and property and equipment, respectively. In the nine months ended
December 31, 2003, $28.2 million and $8.3 million were provided by the maturity of short-term
investments and proceeds from the sale of the software business unit, respectively, while $39.1
million was used to purchase short-term investments. As of December 31, 2004, we did not have any
significant capital purchase commitments. Net cash flows used in financing activities were $0.2 million and $0.1 million for the nine
months ended December 31, 2004 and 2003, respectively. They were attributable to payments of
capital leases, partially offset by the proceeds from the sale of common stock under our Stock
Incentive Plan and Employee Stock Purchase Plan. Working capital at December 31, 2004 was $24.2 million. The following represent our significant working capital commitments: Stock Repurchases On November 10, 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market. Under this program, the Board of
Directors authorized the acquisition of up to 200,000 shares of the Companys common stock. As of
December 31, 2004, the Company had acquired 144,400 shares on the open market that it holds as
treasury stock. Based on the closing price of the Companys common stock on the NASDAQ SmallCap
Market on December 31, 2004, the aggregate funds used to acquire up to 55,600 shares of the
Companys common stock, if purchased, would have a minimal impact on the Companys current cash,
cash equivalent and short-term investment balances. On August 20, 2002, the Board of Directors authorized an additional stock repurchase program
to acquire outstanding common stock in the open market. Under this program, the Board of Directors
authorized the acquisition of up to 5 million shares of common stock. As of December 31, 2004, we
had not repurchased any shares of common stock under this program. Commitments The Company leases its facilities under non-cancelable operating leases expiring at various
dates through July 2005. In December 2004, the Company acquired the right to the use of design
software for a period of two years in exchange for the issuance of notes payable. 17




---



##### Table of Contents



As of December 31, 2004, the Company has cash contractual obligations are as follows (in
thousands): Fiscal
    
    Notes
    
    
    Operating
    
    
    PurchaseYear
    
    Payables
    
    
    Leases
    
    
    Commitments
    
    
    Total2005
    
    $
    125
    
    
    $
    43
    
    
    $
    450
    
    
    $
    6182006
    
    
    500
    
    
    
    47
    
    
    
    
    
    
    
    5472007
    
    
    375
    
    
    
    
    
    
    
    
    
    
    
    375Total minimum lease payments
    
    
    1,000
    
    
    $
    90
    
    
    $
    450
    
    
    $
    1,540Less: Amount representing interest
    
    
    (80
    )Present value of minimum payments
    
    
    920Less: Current portion
    
    
    (460
    )Long-term portion
    
    $
    460
 As of December 31, 2004, we had approximately $0.5 million of outstanding purchase commitments
with a supplier for the purchase of wafers and a packaging subcontractor. We expect to disburse
these payments from our existing cash balances. Based on our current expectations, we believe that our principal source of liquidity
consisting of our cash and cash equivalents and short-term investments, which totaled $23.3 million
at December 31, 2004, will be sufficient to meet our working capital and capital requirements
through at least the next twelve months. We may also utilize cash to acquire or invest in
complementary businesses or to obtain the use of complementary technologies. 18




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##### Table of Contents



Factors that May Affect Future Results We expect continuing losses and may not achieve profitability which could affect our ability
to expand our business. We have incurred significant operating losses in each year since our inception, except in
fiscal 2004. The net income reported in fiscal year 2004 was primarily due to the sale of our
software business. We expect to continue to incur net losses for the foreseeable future, primarily
as a result of expenses for research and development. We have incurred net losses of
approximately $66.7 million from our inception in March 1993 through December 31, 2004. If we
continue to incur net losses, we may not be able to expand our business as quickly as we would
like. We do not know when or if we will become profitable and if we do become profitable, we may
not be able to sustain or increase our profitability. Our future operating results are likely to fluctuate and may fail to meet expectations which could
cause our stock price to decline. Our operating results have varied in the past and are likely to do so in the future as we
attempt to meet consumer demand in the markets for advanced televisions and emerging interactive
displays. Our future operating results will depend on many factors and may fail to meet our
expectations for a number of reasons. Any failure to meet these expectations or those of
securities analysts and investors could cause our stock price to fluctuate or decline
significantly. A number of factors, including those listed below, may cause fluctuations in our
operating results and stock price:  
    the general condition of the semiconductor industry market;
    fluctuations in the volume of product sales, changes in product mix and
pricing concessions on sales;
    the timing, rescheduling or cancellation of significant customer orders;
    our ability to specify, develop, introduce and market new products with smaller geometries,
more features and higher levels of design integration in accordance with design
requirements and design cycles;
    the timing of investments in, and the results of, research and development;
    product introductions and price changes by our competitors;
    changes in industry standards;
    the level of orders received that can be shipped in a given period;
    introduction of interactive television services by service providers;
    availability of manufacturing capacity and raw materials, and inventory write-offs;
    changes in earning estimates or investment recommendations by analysts;
    changes in investors perceptions; and
    the effect of the terrorist attacks in the United States and any related conflicts or similar events
worldwide. 19




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##### Table of Contents



A significant amount of our revenues comes from a few customers and any decrease in revenues from
these customers could significantly impact our financial results. Historically we have been, and we expect to continue to be, dependent on a relatively small
number of OEMs and distributors for a significant portion of our total revenues. Sales to SMS
Electronics, Ltd. accounted for 53% of total revenues for the three months ended December 31, 2004.
Sales to Hughes Network Systems and Weikeng Industrial Co., Ltd. accounted for 26% and 23%,
respectively, of our total revenues for the three months ended December 31, 2003. Sales to SMS
Electronics, Ltd. and Kanematsu Devices Corporation accounted for 40% and 17%, respectively, of
total revenues for the nine months ended December 31, 2004. Sales to SMS Electronics, Ltd.,
Kanematsu Devices Corporation, Weikeng Industrial Co., Ltd., Fujitsu-Siemens Computers Gmbh and
Hughes Network Systems accounted for 15%, 15%, 15%, 13% and 11% of our total revenues for the nine
months ended December 31, 2003, respectively. We may not be able to retain our largest customers
or to obtain additional key accounts. Any reduction or delay in sales of our products to one or
more key customers or our inability to successfully develop relationships with additional key
customers could negatively impact our financial results. Because the emergence of the interactive television market has been slower than anticipated, we may
not be able to sell our products or sustain our business. Our multi-media display processors are incorporated into products that allow interactive
television. The concept of interactive television and the market for products that facilitate it
are new and developing. As a result, our profit potential is unproven and may never materialize.
Broad acceptance of advanced televisions and emerging interactive displays will depend on the
extent to which consumers use devices other than personal computers to access the Internet. To
date, the market for these products has not developed as quickly as our customers and we had
previously anticipated. Consequently, certain of our customers have significant inventory of our
semiconductors or products that incorporate our semiconductors, thereby limiting the opportunity to
sell additional semiconductors to these customers until their present inventories are depleted.
Our success will also depend on the ability of OEMs and service providers that work with our OEMs
to create demand for and market the products incorporating our semiconductors. Unless a
sufficiently large market for advanced televisions and emerging interactive displays and other
products that are used for interactive television develops, demand for products incorporating our
semiconductor solutions may not be sufficient to sustain our business. Customers may cancel or defer significant purchase orders, or our distributors may return our
products, which would cause our inventory levels to increase and our revenues to decline. We sell our products on a purchase order basis through our direct sales channel, sales
representatives and distributors, and our customers may cancel or defer purchase orders at any time
with little or no penalty. We recognize revenues from sales to our distributors when the
distributors have sold our products to their customers. We recognize revenues on sales to our OEM
customers when we ship our products to the OEM. We permit certain of our distributors to return
products to us. If our customers cancel or defer significant purchase orders or our distributors
return our products, our inventories would increase and our revenues would decrease, which would
materially harm our business, as increases in inventory reserves could be required. Refusal of OEM
customers to accept shipped products or delays or difficulties in collecting accounts receivable
could have an adverse effect on our business. Because of our long product development process and sales cycle, we incur substantial expenses
before we generate revenues and may not recover our expenditures. To develop market acceptance of our products, we must dedicate significant resources to
research and development, production and sales and marketing. We develop products based on
forecasts of demand and we incur substantial product development expenditures prior to generating
associated revenues. Our customers typically perform numerous tests and extensively evaluate our
products before incorporating them into their systems. The time required for testing, evaluating
and designing our products into a customers equipment can take up to nine months or more, with an
additional three to nine months or more before an OEM customer commences volume production of
equipment incorporating our products, if ever. Because of this lengthy development cycle, we may 20




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experience a delay between the time we accrue expenses for research and development and sales
and marketing efforts and the time when we generate revenues, if any. Furthermore, achieving a design win with a customer does not necessarily mean that this
customer will order large volumes of our products. A design win is not a binding commitment by a
customer to purchase our products. Rather, it is a decision by a customer to use our products in
the design process. In addition, our customers can choose at any time to discontinue using our
products in that customers designs or product development efforts. If our products are chosen to
be incorporated into a customers products, we may still not realize significant revenues from that
customer if that customers products are not commercially successful. As a result, our
profitability from quarter to quarter and from year to year may be materially affected by the
number and timing of our new product introductions in any period and the level of acceptance gained
by these products. If we fail to successfully develop, introduce and sell new products, we may be unable to
effectively compete in the future. We operate in a highly competitive, quickly changing environment marked by new and emerging
products and technologies. Our success depends on our ability to develop, introduce and
successfully market new products and enhance our existing products in the advanced television and
emerging interactive display markets. The development of these new products is highly complex and,
from time to time, we have experienced delays in completing their development and introduction. Any
one of the following factors could affect our ability to develop, introduce and sell new products
and could materially harm our business:  
    our failure to complete new product designs in a timely manner;
    our inability to manufacture our new products according to design specifications;
    our inability to deliver our products to our customers in a timely manner for any reason,
including a lack of manufacturing capacity or the failure of our contracted foundries to
meet
targeted manufacturing yields; and
    our sales forces and independent distributors inability to create adequate
demand for our
products. Our industry is highly competitive, and we cannot assure you that we will be able to effectively
compete. The market for advanced televisions and emerging interactive displays in particular, and the
semiconductor industry in general, are highly competitive. We compete with a number of domestic
and international suppliers of semiconductors in our targeted markets. We expect competition to
intensify as current competitors expand their product offerings and new competitors enter our
targeted markets. We believe that we must compete on the basis of a variety of factors, including:  
    functionality;
    performance;
    time to market;
    price;
    conformity to industry standards;
    product road maps; and
    technical support. 21




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We currently compete with ATI Technologies, Inc., Broadcom Corporation, Genesis Microchip,
Inc., Pixelworks, Inc., Trident Microsystems, Inc. and Silicon Image, Inc. In addition to these
competitors, we expect other major semiconductor manufacturers will enter our targeted markets as
the multi-media display processors, advanced television emerging display markets become more
established. A number of companies, including International Business Machines Corporation,
STMicroelectronics N.V., National Semiconductor Corporation, Equator Technologies, Inc., LSI Logic
and Philips Electronics N.V., have announced that they are developing or plan to introduce
competing products in the advanced television and emerging interactive display markets which could
result in significant competition. Some of our current and potential competitors operate their own fabrication facilities or have
a longer operating history and significantly greater financial, sales and marketing resources.
They may also have preexisting relationships with our customers or potential customers. As a
result, these competitors may be able to adapt more quickly to new or emerging products, develop
new technologies, or address changes in customer requirements or devote greater resources to the
development and promotion of strategic relationships among themselves or with existing or potential
customers. It is possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Increased competition could harm our business, results
of operations and financial condition by, for example, increasing pressure on our profit margin or
causing us to lose sales opportunities. We depend on three independent foundries to manufacture our products based on our forecasts, which
could result in an oversupply or undersupply of products. We do not own or operate our own fabrication facility. We currently depend upon three outside
foundries, United Manufacturing Corporation, or UMC, and Taiwan Semiconductor Manufacturing
Corporation, or TSMC, both in Taiwan, and HuaHong NEC in the Peoples Republic of China. We do not
have long term supply agreements with these foundries to manufacture our semiconductor products.
Each of these foundries has limited manufacturing capacity. The foundries require us to provide forecasts of our anticipated manufacturing orders in
advance of receiving purchase orders from our customers. This may result in product shortages or
excess product inventory. Obtaining additional supply in the face of product shortages may be
costly or not possible, especially in the short term. Our failure to adequately forecast demand
for our products would materially harm our business. For example, in fiscal 2002 we took an
inventory charge related to slow moving inventory. The foundries may allocate capacity to the
production of other companies products while reducing delivery to us on short notice. Our growing presence within the Peoples Republic of China subjects us to risks of economic and
political instability in the area, which could adversely impact our results of operations. A potentially increasing portion of our products are manufactured by foundries located in the
Peoples Republic of China, or the PRC. Disruptions from natural disasters, health epidemics
(including new outbreaks of SARS and of the Bird flu) and political, social and economic
instability may affect the region, and would have a negative impact on our results of operations.
In addition, the economy of the PRC differs from the economies of many countries in respects such
as structure, government involvement, level of development, growth rate, capital reinvestment,
allocation of resources, self-sufficiency, rate of inflation and balance of payments position,
among others. In the past, the economy of the PRC has been primarily a planned economy subject to
state plans. Since the entry of the PRC into the World Trade Organization in 2002, the PRC
government has been reforming its economic and political systems. These reforms have resulted in
significant economic growth and social change. We cannot assure, however, that the PRC governments
policies for economic reforms will be consistent or effective. Our results of operations and
financial position may be harmed by changes in the PRCs political, economic or social conditions. We may encounter periods of semiconductor oversupply, resulting in pricing pressure, as well as
undersupply, resulting in a risk that we could be unable to fulfill our customers requirements. The semiconductor industry has historically been characterized by wide fluctuations in the
demand for, and supply of, its products. These fluctuations have resulted in circumstances when
supply and demand for the 22




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industrys products have been widely out of balance. Our operating results may be materially
harmed by industry wide semiconductor oversupply, which could result in severe pricing pressure or
inventory write-downs. For example, in fiscal 2002 we took an inventory charge for slow moving
inventory, which negatively impacted our gross margin for fiscal 2002. On the other hand, in a
market with undersupply, we would have to compete with larger companies for limited manufacturing
capacity. If material shortages occur, we may incur additional costs to procure the scarce
components or be unable to have our products manufactured in a timely manner or in quantities
necessary to meet our requirements. Since we outsource all of our manufacturing, we are
particularly vulnerable to supply shortages. As a result, we may be unable to fill orders and may
lose customers. Any future industry wide oversupply or undersupply of semiconductors would
materially harm our business and have a negative impact on our earnings. If we have to qualify new independent foundries for any of our products and do not have sufficient
supply of our products on hand, we may lose revenues and damage our customer relationships. Processes used to manufacture our products are complex, customized to our specifications and
can only be performed by a limited number of manufacturing facilities. The foundries we use have
from time to time experienced lower than anticipated manufacturing yields, particularly in
connection with the introduction of new products and the installation and start up of new process
technologies. In addition, the foundries we use are located in a seismically active area, and
earthquakes have caused these foundries to close for repairs, resulting in a delay in manufacturing
our products. Although we primarily utilize three independent foundries, most of our components are not
manufactured at all of these three foundries at any given time. The inability of one of the
foundries to provide components could result in significant delays and harm our business. In the
event either foundry experienced manufacturing or financial difficulties or suffered any damage or
destruction to its facilities, or in the event of any other disruption of foundry capacity, we may
not be able to qualify alternative manufacturing sources for existing or new products in a timely
manner. For example, in September 1999, Taiwan experienced a major earthquake. The earthquake and
its resulting aftershocks caused power outages and significant damage to Taiwans infrastructure.
Similarly, in September 2001, a typhoon hit Taiwan causing businesses in Taipei and the financial
markets to close for two days. In addition, as a result of the rapid growth of the semiconductor
industry based in the industrial park where both foundries are located, severe constraints have
been placed on the water and electricity supply in that region. Any shortages of water or
electricity or a natural disaster could adversely affect these foundries ability to supply our
products, which could have a material adverse effect on our operating results. Even our current outside foundries would need to have manufacturing processes qualified in the
event of a disruption at the other foundry, which we may not be able to accomplish in a timely
manner sufficient to prevent an interruption in the supply of the affected products. We cannot
assure you that any existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields in the future, or will continue to have sufficient capacity to meet
our needs. If our manufacturing requirements are not satisfied, our business would be materially
harmed. Our semiconductors are complex to manufacture and may have errors or defects which could be costly
to correct. The manufacture of semiconductors is a complex process. Foundries may not achieve acceptable
product yields from time to time due to the complexity of the integrated circuit design, inadequate
manufacturing processes and other reasons. We refer to the proportion of final acceptable
integrated circuits that have been processed, assembled and tested relative to the gross number of
integrated circuits that could have been produced from the raw materials as our product yields.
Identifying defects and determining the reason for low yields may be discovered after production
has begun and at various stages of the production cycle. Our failure to discover defects early in
the production cycle will result in higher costs and may require a diversion of our technical
personnel and resources away from product development in order to correct the defect. In addition,
defective products that have been released into the market and distributed to our customers and end
users may result in harm to our reputation, significant warranty costs, diversion of our technical
and managerial resources and potential product liability claims that would be costly to defend. 23




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Our software is complex and may have bugs or defects which could be costly to correct . Our products depend on complex software that we develop internally and license from others.
Complex software often contains defects, particularly when first introduced or when new versions
are released. Determining whether our software has defects may occur after our products are
released into the market and distributed to our customers and end users, and may result in harm to
our reputation, significant warranty costs, diversion of our technical resources and potential
product liability claims that would be costly to defend and divert managerial resources. We face foreign business, political and economic risks because a majority of our sales are to
customers outside of the United States. Sales of our products to our OEM customers and to distributors located outside the United
States accounted for 76%, 86%, 32%, 83% and 87% of our total revenues in fiscal years 2004, 2003,
and 2002, and three and nine months ended December 31, 2004, respectively. We anticipate that
sales to customers located outside the United States will continue to represent a significant
portion of our total sales in future periods. In addition, many of our domestic customers sell
their products outside of North America, thereby indirectly exposing us to risks associated with
foreign commerce. Asian economic instability impacts the sales of products manufactured by our
customers, as does the Chinese New Year, during which time many manufacturers and businesses close
their operations. We may be negatively impacted by terrorist attacks and related or other
conflicts worldwide. We could also experience greater difficulties collecting accounts receivable
from customers outside of the United States. Accordingly, our operations and revenues are subject
to a number of risks associated with foreign commerce. To date, we have denominated sales of our products in foreign countries exclusively in United
States dollars. As a result, any increase in the value of the United States dollar relative to the
local currency of a foreign country will increase the price of our products in that country so that
our products become relatively more expensive to customers in the local currency of that foreign
country. As a result, sales of our products in that foreign country may decline. To the extent
any of these types of risks materialize, our business would be materially harmed. If the industries into which we sell our products experience recession or other cyclical effects
impacting our customers budgets, our operating results could be negatively impacted. The primary customers for our products are companies in the advanced television and emerging
display device markets. Any significant downturn in these particular markets or in general
economic conditions which result in the cutback of research and development budgets or capital
expenditures would likely result in the reduction in demand for our products and services and could
harm our business. For example, the United States economy, including the semiconductor industry,
has experienced a recession, which has negatively impact our business and operating results. If
the economy declines as a result of terrorist attacks or economic, political and social turmoil,
existing and perspective customers may continue to reduce their design budgets or delay
implementation of our products, which could further harm our business and operating results. In addition, the markets of semiconductor products are cyclical. In recent years, some Asian
countries have experienced significant economic difficulties, including devaluation and instability
business failures and a depressed business environment. These difficulties triggered a significant
downturn in the semiconductor market, resulting in reduced budgets for chip design tools. In
addition, the electronics industry has historically been subject to seasonal and cyclical
fluctuations in demand for its products, and this trend may continue in the future. These industry
downturns have been, and may continue to be, characterized by diminished product demand, excess
manufacturing capacity and subsequent erosion of average selling prices. As a result, our future
operating results may reflect substantial fluctuations from period to period as a consequence of
these industry patterns, general economic conditions affecting the timing of orders from customers
and other factors. Any negative factors affecting the semiconductor industry, including the
downturns described here, could significantly harm our business, financial condition and results of
operations. We depend on key personnel, the loss of whom would impair or inhibit the growth of our business. Our success depends on the skills, experience and performance of our executive officers and
other key management and technical personnel, many of whom would be difficult to replace. We are
particularly dependent 24




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on Eli Porat, our Chief Executive Officer and President. The competition for employees with
technical skills is intense and we may not be able to attract and retain a sufficient number of
such qualified new personnel in the future. The loss of the service of one or more of our key
employees, or our failure to attract, retain and motivate qualified personnel would inhibit the
growth of our business. If we are unable to maintain our listing on the Nasdaq SmallCap Market, the price and liquidity of
our common stock may decline. Beginning at the commencement of trading on December 4, 2002, our common stock was listed on
the Nasdaq SmallCap Market. The transfer of our common stock to the Nasdaq SmallCap Market will
result in decreased liquidity of our common stock and may further decrease the price per share of
our common stock. There can be no assurance that we will be able to satisfy all of the quantitative
maintenance criteria for continued listing on the Nasdaq SmallCap Market including a continued
minimum bid price of $1.00 per share. If we fail to maintain continued listing on the Nasdaq
SmallCap Market and must move to a market with less liquidity, our financial condition could be
harmed and our stock price would likely decline. If we are delisted, it could have a material
adverse effect on the market price of, and the liquidity of the trading market for our common
stock. We rely on strategic relationships to commercialize our products, and these relationships may
require that we expend significant resources without guarantees that our endeavors will be
profitable. We rely on strategic relationships with some of our customers who we believe are the market
leaders in our target markets. These relationships often involve the proposed development by us of
new products involving significant technological challenges. Since the proposed products under
development may offer potential competitive advantages to our customers, considerable pressure is
frequently placed on us to meet development schedules. While an essential element of our strategy
involves establishing such relationships, these projects require substantial amounts of our limited
resources, with no guarantee of revenues to us, and could materially detract from or delay the
completion of other important development projects. Delays in development could impair the
relationship between our customers and us and negatively impact sales of the products under
development. Moreover, our customers may develop their own solutions for products currently
supplied by us, which could have an adverse effect on our business. We depend on third party subcontractors for assembly of our semiconductors which reduces our
control over the delivery, quantity, quality, or cost of our products. Substantially all of our products are assembled by one of three subcontractors, two of which
are located in Taiwan and one in the Peoples Republic of China. Typically, we procure services
from these subcontractors on a purchase order basis. Their availability to assemble our products
could be adversely affected if either subcontractor experiences financial difficulties or suffers
any damage or destruction to its facilities or any other disruption of its assembly capacity.
Because we rely on third party subcontractors for assembly of our products, we cannot directly
control product delivery schedules. We have experienced in the past, and may experience in the
future, product shortages or quality assurance problems that could increase the cost of
manufacturing or testing of our products. It is time consuming and difficult to find and qualify
alternative assemblers. If we are forced to find substitute subcontractors, shipments of our
products could be delayed. Any problems associated with the delivery, quantity or cost of our
products could harm our business. Political instability in the Peoples Republic of China or Taiwan could harm our manufacturing and
research and development capabilities and negatively impact our product sales. We operate our research and development facility in the Peoples Republic of China. In
addition, almost all of our products are manufactured and assembled outside of the United States at
facilities operated by third parties in Taiwan and the Peoples Republic of China. The political
and economic conditions in the region, including the Peoples Republic of Chinas dispute with
Taiwan, may adversely impact our operations including manufacture and assembly of our products and
research and development efforts. We cannot assure you that restrictive laws or policies on the
part of either the Peoples Republic of China or the United States will not constrain our ability
to operate in both countries. If we are required to relocate our facilities, our business will be
disrupted and our costs associated with research and development will increase. 25




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If our competitors use our intellectual property and proprietary rights, our ability to compete
would be impaired. Our success depends in part upon our rights in proprietary technology and processes that we
develop and license from, and to, others. We rely on a combination of patent, copyright, trademark
and trade secret laws, as well as confidentiality agreements with our employees, consultants and
strategic partners in order to protect proprietary technologies that use our products. We cannot
assure you that these measures will provide meaningful protection for our proprietary technologies
and processes, and they do not prevent independent third party development of competitive products.
In addition, it is difficult to monitor unauthorized use of technology, particularly in foreign
countries where laws may not protect our proprietary rights as fully as in the United States. We currently have patent applications pending in the United States, and we may seek additional
patents in the future. Because the content of patent applications in the United States is not
publicly disclosed until the patent is issued, applications may have been filed which relate to our
products or processes. We cannot assure you that our current patent applications or any future
patent applications will result in a patent being issued with the scope of the claims we seek, if
at all, or whether any patents we have or may receive will be challenged or invalidated. The
failure of any patents to provide protection to our technology would make it easier for our
competitors to offer similar products. We may face intellectual property infringement claims that could be costly and could result in the
loss of proprietary rights which are necessary to our business. Other parties may assert patent infringement claims against us, including claims against
technology that we license from others, and our products or processes may infringe issued patents
of others. Litigation is common in the semiconductor industry and any litigation could result in
significant expense to us. Litigation would also divert the efforts of our technical and
management personnel, whether or not the litigation is determined in our favor. Litigation could
also require us to develop non-infringing technology or enter into royalty or license agreements.
These royalty or license agreements may not be available on acceptable terms, including limitations
on representations and warranties regarding infringement and indemnification in the event of
infringement claims. Our failure or inability to develop non-infringing technology, license the
proprietary rights on a timely basis or receive appropriate protection on licensed technology would
harm our business. Regulation of our customers products may slow the process of introducing new products and could
impair our ability to compete. The Federal Communications Commission, or the FCC, has broad jurisdiction over our target
markets. Various international entities or organizations may also regulate aspects of our business
or the business of our customers. Although our products are not directly subject to regulation by
any agency, the transmission pipes, as well as much of the equipment into which our products are
incorporated, are subject to direct government regulation. For example, before they can be sold in
the United States, advanced televisions and emerging interactive displays must be tested and
certified by Underwriters Laboratories and meet FCC regulations. Accordingly, the effects of
regulation on our customers or the industries in which our customers operate may, in turn, harm our
business. FCC regulatory policies affecting the ability of cable operators or telephone companies
to offer certain services and other terms on which these companies conduct their business may
impede sales of our products. In addition, our business may also be adversely affected by the
imposition of tariffs, duties and other import restrictions on systems of suppliers or by the
imposition of export restrictions on products that we sell internationally. Changes in current laws
or regulations or the imposition of new laws or regulations in the United States or elsewhere could
harm our business. 26




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Discussion of Market Interest Rate Risk For quantitative and qualitative disclosures about market risks affecting us, see Item 7A
Quantitative Disclosure About Market Risk of our Annual Report on Form 10-K for the year ended
March 31, 2004 and on Form 10-Q for the quarter ended September 30, 2004. Our exposure to market
risk has not changed materially since March 31, 2004. 
 ITEM 4: CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures.We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934
(the Exchange Act), that are designed to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the
limitations noted above, our disclosure controls and procedures were effective to ensure that
material information relating to us, including our consolidated subsidiaries, is made known to them
by others within those entities, particularly during the period in which this Quarterly Report on
Form 10-Q was being prepared. (b) Changes in internal control over financial reporting.There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified
in connection with the evaluation described in Item 4(a) above that occurred during our last fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
 PART II: OTHER INFORMATION 
 ITEM 5: OTHER EVENTS Our 2005 Annual Meeting of Stockholders will be held on August 11, 2005 at such place and time
as will be set forth in our proxy statement relating to that meeting. A stockholder proposal not
included in the proxy statement for the 2005 Annual Meeting will be ineligible for presentation at
the meeting unless the stockholder gives timely notice of the proposal in writing to our Secretary
at our principal executive offices and otherwise complies with the provisions of our Bylaws. To be
timely, the Companys Bylaws provide that the Company must have received the stockholders notice
not less than 60 days nor more than 90 days prior to the scheduled date of such meeting. However,
if notice or prior public disclosure of the date of the annual meeting is given or made to
stockholders less than 75 days prior to the meeting date, the Company must receive the
stockholders notice by the earlier of (i) the close of business on the 15th day after the earlier
of the day the Company mailed notice of the annual meeting date or provided such public disclosure
of the meeting date and (ii) two days prior to the scheduled date of the annual meeting. For the
Companys 2005 Annual Meeting of Stockholders, stockholders must submit written notice to the
Secretary in accordance with the foregoing Bylaw provisions no later
than June 12, 2005. 27




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ITEM 6: EXHIBITS ExhibitNumber31.1
    
    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   **
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and
34-47986, Final Rule: Managements Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed filed
for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the Exchange Act, except to
the extent that the registrant specifically incorporates it by reference. 28




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TVIA, INC.February 14, 2005
    
    By:
    
    /s/            Diane BjorkstromDiane BjorkstromChief Financial Officer and Vice President,Administration(Principal Financial Officer andDuly Authorized Signatory)
 29




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EXHIBIT INDEX ExhibitNumber31.1
    
    Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
   **
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and
34-47986, Final Rule: Managements Reports on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in
Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed filed
for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the Exchange Act, except to
the extent that the registrant specifically incorporates it by reference.